The first rig build in weeks, a regional scarcity, and a well-dressed threat from the Prince himself.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on August 29, 2022. I used to think all of California was Bakersfield and LA since those were about the only 2 spots I was able to visit in the time that I’ve been here in the past year. Boy was I WRONG. The old lady flew out for a quick visit (bless her heart) and we had the opportunity to drive around Paso Robles, San Luis Obispo, and Morro Bay while sampling everything those areas had to offer. It certainly opens up a bigger spot in my heart for California, but not big enough to overshadow the part already occupied by Colorado (not yet at least). But you didn’t come here to listen to me rank each state I’ve ever been to. This is no travel podcast. This is the RARE PETRO podcast where we bring you the energy space’s most impactful news stories and hardest-hitting statistics. Let’s do it!
Starting off with commodity prices we see that almost everything is on the up and up. WTI is up by magnitudes of dollars today. Monday started off with a $94 barrel, but now it is mere cents away from touching $97. I doubt it will stay that high for a significant period of time, though it is bullish to see it shoot up like that this early in the day. I predict that we will settle down around a $95 barrel for the week, though that doesn’t mean it could land a few dollars higher or lower. Brent maintains a healthy lead, though the spread has widened to about $8 as it hits a $105 barrel. Are we headed back to a $120 barrel? It sure seems like it, and I think that by the time we get deep into winter it could even be a little higher. Natural gas cooled its jets and seems intent on remaining around the 9-and-a-half dollar range for the time being as it has expressed little volatility and hugged this price point for almost a full week. This is a really healthy set of commodity pricing.
Next up is the rig count. After 3 straight weeks of a falling rig count, we are confronted with some good news. The most recent numbers suggest a 3-rig increase bringing the total to 765, which is still 257 more rigs than we had this time last year. That year-over-year difference is important to note as it reveals how well the count is doing over a much more significant time frame. It’s all back to business in the Permian as it finds a way to bring on 3 more rigs. The next best was the Ardmore Woodford and the Haynesville at 2 and 1 respectively. The Cana Woodford and Eagle Ford each lost 2. This means Texas is up a total of 2 and Colorado 1 with no other changes in significant states or the gulf for that matter. There is a greater emphasis on rigs targeting oil reserves than gas with this net change. Otherwise, there isn’t too much else to say. I for one am just happy that we are finally back on the positive side and I hope it continues for many more weeks.
Lastly of course is the inventory report which was published last week as a Thirsty Thursday segment. Here’s what you may have missed, though i encourage you to go look at the data on www.rarepetro.com. Many folks expected that last week’s 7 million barrel draw would have been met by a large build this week. The EIA anticipated a drawdown of no more than 1 million barrels. Actual results show a more than 3 million barrel draw. The API expected no more than a half million draw, but even their pessimism was met with a more than 5.5 million barrel draw. At this point, we will start incorporating a weekly look at the SPR levels since they just set a new record for 35-year low as they go nearly vertical (downwards, that is) as the Biden Administration continues to drain anywhere between 3-7 million barrels a week. This is supposed to go through the month of September. Hopefully, energy prices don’t get higher by the time we reach 40-week lows. We have to refill it at some point… right? Though it is likely by chance, a pattern of 2 weeks of builds followed by two weeks of drawdowns has been established. It seems as if both builds and draws are growing in magnitude which implies a market of volatility. Gasoline inventories are “virtually unchanged” according to the EIA, though they are still about 7% below the 5-year average. This time last year we set new historical lows for the time period, and demand will only continue to return. Even though prices for gasoline continue to fall lower and lower, it is lagging behind concerns in the supply. It is down 4 more cents on the week and appears to be quickly slowing. California used to be the reigning king of the most expensive gasoline in the United States, but this week that title goes to Hawaii which is the proud owner of a 1.5-cent premium at $5.313 per gallon. Arkansas is now the cheapest state to buy gasoline where you can find an average gallon of regular grade at $3.395, but we don’t encourage you to get excited for a flat $3.000. Distillates continue to remain flat as the average range pulls further away. This means distillates are approaching the largest gap between historical and actual stocks seen in at least the last 5 years. Propane traded sideways in the most recent report but still remains within its expected historical range.
But that is all we’ve got for statistics. Why don’t we take a little look at current events? It turns out we’ve got a localized disruption to gasoline and diesel prices thanks to an accident at the largest refinery in the Midwest. BP PLC stopped 2 crude units at the 435,000 barrel-a-day facility located in Whiting, Indiana. Fortunately, the repair should be pretty easy as it was simply a fire that damaged heat circulation equipment. Without the cool water running through the facility risks damaging components, so they anticipate being shut down through the weekend. While this doesn’t sound like too significant of a problem to most, one must consider the significance of harvest season. Demand for fuels will be much higher, especially in the case of diesel which saw an immediate 5-cent premium. This will cut into the profits of the farmers in the breadbasket who are already dealing with high fuel prices thanks to the lowest regional fuel inventories since 2006. Unless you are regionally located in the midwest you likely won’t see any change in market prices for food or fuel, though it certainly eats into the profits of farmers in the area. I will add that Canadians could see some impact as one of the shut-in units processes 90% Canadian crude, but even then we are cherry-picking.
Next up is a story from Saudi Arabia. The Energy Minister of Saudi happens to be crown prince Abdulaziz bin Salman, and he made a statement that I feel should have generated much more buzz in the news space. In a Bloomberg interview, the prince said extreme volatility was, “undermining the market’s essential function of efficient price discovery. This vicious circle is amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions.” I gotta say, the Prince hit the nail on the head. He also went on to claim that OPEC was stronger and more cohesive than ever and could cut capacity at any time and in different forms. While I don’t exactly understand what indirect methods they will use to lower production capacity, he is likely not bluffing. OPEC production targets fell almost 3 million barrels per day too low in July. Pretty much everything he touched on is exactly what RARE PETRO has been claiming for quite some time and we aren’t alone. Other banks and financial institutions recognize that a $150 barrel of oil could be much closer than initially anticipated. Fundamentals and market indicators are not seeing eye to eye, and more of the world is beginning to realize it. Even Elon Musk acknowledged the importance of oil in a recent line of questions during a conference in Norway. He said, “Realistically I think we need to use oil and gas in the short term, because otherwise civilization will crumble. One of the biggest challenges the world has ever faced is the transition to sustainable energy and to a sustainable economy. That will take some decades to complete.” When asked if he thought if the industry should continue to drill, he said “I think some additional exploration is warranted at this time.’’ Again, positions that RARE PETRO agrees with. Win people at this caliber of royalty, financial expertise, and business acumen all share some common ground it must mean that there is at least a little bit of truth to the story. Even though prices are up, crude inventories have only leveled thanks to SPR releases. DUCs are quickly disappearing. No money is going into exploration or acquisition unless it fits into a corporation’s cookie-cutter portfolio.
Folks, an expensive future is not far around the corner and it is up to an individual to decide how they want to navigate it. Do you want to be at the mercy of the markets and follow the opinion of the masses, or do you want to read the writing on the wall so that you may come out on top? If it is the latter, we encourage you to frac that follow button so you can always stay up to date on what RARE PETRO releases. Check out our LinkedIn to stay up to day on all forms of content released as we often come out with written periodicals and Thirsty Thursday. It is up to you to get ahead of your peers in the energy space, and the easiest way to do that is to let us do all the hard research for you. All you have to do is draw your own conclusions. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!